I'd like to invest some money and keep it in a non-taxed account.
I've heard of the caymans and other offshore banks.
How is this done and can I use that money to invest in the market?
Dave,
You've been watching too many movies
Offshore banking (OSB) is popular becuase many of the countries famous
for the practice have lower taxation and increased privacy (accounts
are titled with numbers, not names, and they don't ask where the money
came from). In reality, OSB has some advantages, but it isn't all it's
cracked up to be (I'm assuming you are a US citizen).
Some things to consider:
1. The US tax system requires you report unearned income regardless of
where it was earned. The OSB is not required to report the income, but
you still are. That alone probably eliminates most of your
motivations.
2. Some of the infamous OSB countries are politically unstable. If
political upheaval leads to nationalization of the OSB, you'll likely
lose everything. If you already live in an unstable country, an OSB
could actually be safer. However, I don't consider this the case for
the typical American or western European.
3. In a similar vein, the US gov't suspects the OSB system of helping
fund terrorism (although not necessarily on purpose). As a result, you
can expect regulation too increase long before you see it decrease.
How much so we can only speculate.
4. There's no "FDIC" in many OSB countries. The bank goes belly-up...
you lose.
5. You can't get any substantial sum of money into or out of the US
without declaring it. Even if you have been hiding your OSB income
from the IRS, you aren't going to be able to get the money back into
the US without sending up a dozen red flags.
6. OSBs can potentially shield your assets from creditors.
There are numerous legitimate reasons to open an offshore account,
especially for large corporations. However, for the average American
investor the benefits are minimal and are often outweighed by the
additional risks. Simply put, if you want to avoid US tax law, move to
a different country.